Are Stocks and Gold Both Vulnerable?

By  AUG 07, 2013 2:20 PM

There have been some signs that the stock market is losing upside momentum; some investors are wondering if a top is now in place.


The Dow Industrials (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX) both closed lower for the second day in a row. The market internals were about 3 to 1 negative with more stocks on the NYSE making new lows than new highs.

Stocks in Asia were hit hard again as the yen moved higher and Japan’s Nikkei 225 (INDEXNIKKEI:NI225) lost 4%. There was also heavy selling in Hong Kong as the Hang Seng (INDEXHANGSENG:HSI) was 1.5% lower. In Europe, stocks are down slightly as are the US futures.

The selling was much heavier in the precious metals as the SPDR Gold Trust (NYSEARCA:GLD) was down almost 1.4% while the Market Vectors Gold Miners (NYSEARCA:GDX) lost 5.5%. The selling was less heavy in silver as the iShares Silver Trust (NYSEARCA:SLV) was down just under 1%.

There were some signs that the stock market was losing upside momentum and some investors are wondering if a top is now in place. Those who went bottom fishing in the precious metals last month were likely shaken by Tuesday’s sharp decline, but are these markets vulnerable to even lower prices?

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Chart Analysis: On the daily chart of the Spyder Trust (NYSEARCA:SPY), this week’s decline looks pretty insignificant as it is still above its 20-day EMA at $168.34.
The iShares Russell 2000 Index ETF (NYSEARCA:IWM) made a new high Monday and then closed Tuesday below the lows of the prior two days.

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The SPDR Gold Trust hit a low of $114.68 at the end of June, and 16 days later on July 23, it reached the quarterly pivot at $129.89 where the rally stalled.
The Market Vectors Gold Miners also had a sharp rally from the June lows and the rally high at $28.35 was just above the quarterly pivot at $28.03. What It Means: The daily technical studies on the NYSE Composite (INDEXNYSEGIS:NYA) look weaker than those on either the SPY or IWM. The McClellan Oscillator rallied back to the zero line last week and now shows a clear downtrend. Its A/D line also looks a bit weaker.

The OBV on the ETFs are still positive, which is not consistent with a major decline from current levels. Therefore, the stock market appears to be consolidating now and could drop back to the mid-June highs over the next few weeks. This would be a decline of 2-3%. The action over the week should clarify the outlook.

On July 25 column, I explained why the rally in gold looked like a "bull trap." This is where prices rally far enough to entice some to buy just as the rally is faltering.

Gold and the gold miners still look vulnerable over the next few weeks. There is likely to be a rebound in the next week, but then expect another wave of selling. The June lows are likely to be tested and GDX could break to new lows.

Editor's Note: This article was written by Tom Aspray of MoneyShow.

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